The Treasury said last week it asked departments to prepare proposals on cutting their budgets 5% in 2020, 6% in 2021 and 7% in 2022, which is estimated to peel off as much as R300bn over three years.
This was largely aimed at plugging the funding gap the Eskom bailout will create, reducing borrowing requirements and keeping ratings agencies at bay with their concern about the country’s fiscal health (or lack of it).
The challenge is that the economy can hardly afford fiscal austerity if it is to bootstrap itself out of the low-growth trap it finds itself in. Fiscal austerity in a struggling economy has often yielded terrible results for productivity and growth in the medium and long term.
SA’s economy is struggling with keeping jobs, attracting the right level of investment, competing in a global export market and raising aggregate output.
The Keynesians are well-known anti-austerity scholars and practitioners. John Maynard Keynes argued that the right time to exercise fiscal austerity is boom periods, not economic slumps. Instead, Keynesian theory argues for fiscal stimulus to boost aggregate demand. Under this model, the SA government would now be looking at how it can spend through investment its way back into sustainable economic growth, until the economy can get to full employment, when there would be a diminishing return to fiscal stimulus.
Of course, this view does not go uncriticised. Friedrich von Hayek, a defender of economic liberalism, argues that many problems in economies are a result of imprudent borrowing and spending by public authorities. He argues that if growth is desired, the same authorities ought to create an environment for free movement of capital and relaxed restrictions on trade, and not revert to tapping into borrowing. Under this model, the government would focus on the “ease of doing business”, while remaining firm on a fiscal austerity path.
In his 1986 endogenous growth model, recent Nobel laureate Paul Romer argued that, unlike the Solow-Swan growth model, there are increasing returns to capital.
In addition, he argues that human development capital is an endogenous function of long-term growth. And in an SA context, where low growth is a function of low skills investment and development, low levels of R&D, weak demand, low levels of investment and low productivity on comparable standards, then the endogenous growth model may suggest fiscal austerity is counterproductive for long-term sustainable economic growth.
Taking a more contemporary approach to the Romer model, Francesco Bianchi et al (2019) studied the medium-term consequences of austerity in European countries and found that austerity programmes had adverse effects on productivity and the overall level of output, in that it deterred investment in capital and adoption of new technologies.
In 2012, IMF chief economist Olivier Blanchard reflected in the World Economic Outlook report that the IMF had understated the effect of fiscal austerity in a weak or struggling economy. It was found that weak economies that aimed to reduce their deficits through spending cuts caused more economic damage than expected.
SA’s economy is struggling with keeping jobs, attracting the right level of investment, competing in a global export market and raising aggregate output. It would therefore not be prudent for policymakers to drive fiscal programmes in an effort to placate ratings agencies. For the economy to remain above investment grade it needs to grow; from which higher tax revenue, higher employment and higher aggregate output could be realised.
Fiscal expansion, therefore, is the opportunity policymakers should be exploring, and how to ensure it achieves the much-needed economic boost.
• Skenjana (@sifiso_skenjana) is founder and financial economist at AFRA Consultants. He is completing a PhD in finance for development.
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